OPEC restraint sowing seeds for market share war

May 24, 2002
OPEC's price restraint today may be sowing the seeds of tomorrow's market share war.

It is an inevitability of sustained higher oil prices that talk of market share war soon rears its ugly head.

The Organization of Petroleum Exporting Countries has been applauded by markets for engineering, together with some key non-OPEC oil exporters, the production restraint that has spawned higher oil prices.

Now OPEC is being chastised for not allowing oil demand to recover and being warned against encroachment upon its market share.

Norway and Mexico already have quietly stepped away from their pledges to curb output. And if there were any doubt about Russia's willingness to extend its pledged restrained yet another quarter, it was erased by the meeting between US President George W. Bush and his Russian counterpart, Vladimir Putin, in late May. As a corollary to that meeting, there were reports that Russia had offered to make up to the US any shortfall of oil supplies owing to a disruption in other parts of the world-a not-so-subtle dig at perpetual Middle East oil supply threats. Putting aside the question of whether Moscow could make good on that pledge, the intent seems clear: Russia is continuing to position itself as a "reliable" alternative to Middle East oil supplies.

Perhaps it is a bit much to suggest Putin is seeking a quid pro quo, but this pledge comes rather soon after Moscow had acquiesced to the US in approving the "smart sanctions" the US had sought against Iraq (see Market Hotline, OGJ Online, May 10, 2002, and OGJ, May 20, 2002, p. 72). Such sanctions, carrying with them the requirement that Iraq readmit inspectors to monitor Baghdad's weapons programs, are an essential part of the Bush administration's paving the way for the eventual ouster of Saddam Hussein.

In any event, Russia also said, on the day of the Bush-Putin summit, that it would no longer rein its oil output because oil prices were relatively high.

Press reports quoted Finance Minister Alexei Kudrin as saying his country would be unlikely to curb exports unless the price of crude oil were to fall below $20/bbl.

Kudrin didn't specify which crude oil, but it's a safe bet the price target he had in mind is well below the OPEC target price range of $22-28 for the OPEC basket of crudes-not to mention the Saudi Arabia-favored $25/bbl for that basket.

Global demand down

Meanwhile, there are signs that the recovery in global oil demand is being hampered by high oil prices.

That's the contention of London's Centre for Global Energy Studies, which points to the year-on-year drop of almost 1 million b/d in world oil demand in the first quarter.

OPEC argues that current production is pegged to the anticipated growth in oil demand in the second half, which CGES projects at 1.4 million b/d. If that proves true, then OPEC needs to agree at its June meeting to hike output in July to keep prices from overheating by yearend, says CGES. If that growth fails to materialize, then OPEC can delay that hike until October without spiking prices, the think tank contends.

"What OPEC ought to be doing, though, is assessing whether a $25/bbl target price is really in its best interests," CGES said. The consulting group estimates that, if OPEC raises its output by 1 million b/d in October, its market will have shrunk by 2 million b/d vs. 2001 and 3 million b/d vs. 2000-and the prospects for 2003 don't look much better.

"OPEC needs growth in global oil demand to create a market for its oil, but that growth is being choked off by the high oil prices that OPEC itself is defending," CGES concluded. "A $25/bbl oil price is limiting oil demand growth while stimulating competitive supplies, the very things OPEC least wants or needs."

OPEC solidarity

On the other hand, we have oil supplies ramping up in Iraq and Venezuela. Fresh from its 30-day embargo snit that the world ignored, Iraq is ramping up oil production to higher levels than before the embargo. And we have the question of Venezuela's burgeoning new volumes of synethic crude from the Orinoco heavy oil integrated megaprojects. While projected in the near term at 100,000-200,000 b/d, it isn't clear whether these volumes should be counted against Venezuela's quota-although they'll certainly count on world oil markets.

So will the interim months leading to Saddam's ouster next year be-absent an unexpected jump in demand-a waiting game: What will unravel first, OPEC market share or OPEC solidarity?

Stay tuned.

(Online May 24, 2002; author's e-mail: [email protected])

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